Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - TOWER FINANCIAL CORP | ex32_1.htm |
EX-32.2 - EXHIBIT 32.2 - TOWER FINANCIAL CORP | ex32_2.htm |
EX-31.1 - EXHIBIT 31.1 - TOWER FINANCIAL CORP | ex31_1.htm |
EX-31.2 - EXHIBIT 31.2 - TOWER FINANCIAL CORP | ex31_2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
T
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
£
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TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ____________ to ____________
Commission file number 000-25287
TOWER FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
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INDIANA
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35-2051170
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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116 East Berry Street, Fort Wayne, Indiana 46802
(Address of principal executive offices)
(260) 427-7000
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(Registrant’s telephone number)
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Indicate by check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
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Accelerated filer £
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Non-accelerated filer £
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Smaller reporting company T
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(Do not check if a smaller reporting company.)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
Yes £ No T
Number of shares of the issuer’s common stock, without par value, outstanding as of April 29, 2011: 4,827,843.
Forward-Looking Statements
This report, including the section on “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, includes "forward-looking statements." All statements regarding our anticipated results or expectations, including our financial position, business plan and strategies, are intended to be forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.
Typically, forward-looking statements are predictive and are not statements of historical fact, and the words "anticipate," "believe," "estimate," "seek," "expect," "plan," "intend," “think” and similar conditional expressions, as they relate to us or to management, are intended to identify forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, and although we have based these expectations upon beliefs and assumptions we believe to be reasonable, these expectations may prove to be incorrect. Important factors that could cause actual results to differ materially from our expectations include, without limitation, the following:
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·
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The impact of a prolonged recession on our asset quality, the adequacy of our allowance for loan losses and the sufficiency of our capital;
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·
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the continued weakness of the local economy in our primary service area;
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·
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the effect of general economic and monetary conditions and the regulatory environment on the Bank’s ability to attract deposits, make loans and achieve satisfactory interest spreads;
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·
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the risk of further loan delinquencies and losses due to loan defaults by both commercial loan customers or a significant number of other borrowers;
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·
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general changes in real estate, business and general property valuations underlying secured loans;
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·
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the level of our non-performing substandard or doubtful assets;
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·
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restrictions or additional capital requirements imposed on us by our regulators; and
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·
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dependence on our key banking and management personnel.
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We also refer you to a discussion of the many other risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K, in our Quarterly Reports on Form 10-Q, or in other reports we file from time to time with the Securities and Exchange Commission, which are available on the Commission’s website at www.sec.gov.
PART I. FINANCIAL INFORMATION | |||
Item 1.
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page no.
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4
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5
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7
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8
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9
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Item 2.
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30
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Item 4.
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35
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PART II. OTHER INFORMATION | |||
Item 1.
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36
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Item 1a.
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36
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Item 6.
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37
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Tower Financial Corporation
At March 31, 2011 (unaudited) and December 31, 2010
March 31,
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December 31,
|
|||||||
2011
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2010
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|||||||
ASSETS
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||||||||
Cash and due from banks
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$ | 12,983,538 | $ | 24,717,935 | ||||
Short-term investments and interest-earning deposits
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662,736 | 3,313,006 | ||||||
Federal funds sold
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2,221,872 | 1,648,441 | ||||||
Total cash and cash equivalents
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15,868,146 | 29,679,382 | ||||||
Long-term interest earning deposits
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996,000 | 996,000 | ||||||
Securities available for sale, at fair value
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123,635,639 | 110,108,656 | ||||||
FHLB and FRB stock
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4,075,100 | 4,075,100 | ||||||
Loans held for sale
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432,413 | 2,140,872 | ||||||
Loans
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489,249,575 | 486,914,115 | ||||||
Allowance for loan losses
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(11,907,795 | ) | (12,489,400 | ) | ||||
Net loans
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477,341,780 | 474,424,715 | ||||||
Premises and equipment, net
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8,237,010 | 8,329,718 | ||||||
Accrued interest receivable
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2,486,910 | 2,391,953 | ||||||
Bank owned life insurance
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16,647,270 | 13,516,789 | ||||||
Other real estate owned (OREO)
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4,740,592 | 4,284,263 | ||||||
Prepaid FDIC Insurance
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2,377,570 | 2,864,527 | ||||||
Other assets
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7,278,403 | 7,116,280 | ||||||
Total assets
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$ | 664,116,833 | $ | 659,928,255 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
LIABILITIES
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||||||||
Deposits:
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||||||||
Noninterest-bearing
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$ | 87,598,846 | $ | 92,872,957 | ||||
Interest-bearing
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487,926,557 | 483,483,179 | ||||||
Total deposits
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575,525,403 | 576,356,136 | ||||||
Federal funds purchased
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100,000 | - | ||||||
Federal Home Loan Bank (FHLB) advances
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11,500,000 | 7,500,000 | ||||||
Junior subordinated debt
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17,527,000 | 17,527,000 | ||||||
Accrued interest payable
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1,641,739 | 1,415,713 | ||||||
Other liabilities
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3,409,668 | 4,000,654 | ||||||
Total liabilities
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609,703,810 | 606,799,503 | ||||||
STOCKHOLDERS' EQUITY
|
||||||||
Preferred stock, no par value, 4,000,000 shares authorized; 1,500 shares and 7,750 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
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146,558 | 757,213 | ||||||
Common stock and paid-in-capital, no par value, 6,000,000 shares authorized; 4,892,843 and 4,789,023 issued; and 4,827,843 and 4,724,023 shares outstanding at March 31, 2011 and December 31, 2010
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44,362,537 | 43,740,155 | ||||||
Treasury stock, at cost, 65,000 shares at March 31, 2011 and December 31, 2010
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(884,376 | ) | (884,376 | ) | ||||
Retained earnings
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9,233,222 | 8,450,579 | ||||||
Accumulated other comprehensive income, net of tax of $801,103 at March 31, 2011 and $548,730 at December 31, 2010
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1,555,082 | 1,065,181 | ||||||
Total stockholders' equity
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54,413,023 | 53,128,752 | ||||||
Total liabilities and stockholders' equity
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$ | 664,116,833 | $ | 659,928,255 |
The following notes are an integral part of the financial statements.
Tower Financial Corporation
For the three months ended March 31, 2011 and 2010
(unaudited)
|
||||||||
Three Months Ended
|
||||||||
March 31,
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||||||||
2011
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2010
|
|||||||
Interest income:
|
||||||||
Loans, including fees
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$ | 6,288,964 | $ | 6,883,002 | ||||
Securities - taxable
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579,369 | 639,091 | ||||||
Securities - tax exempt
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393,162 | 244,551 | ||||||
Other interest income
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14,262 | 6,248 | ||||||
Total interest income
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7,275,757 | 7,772,892 | ||||||
Interest expense:
|
||||||||
Deposits
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1,361,146 | 1,759,498 | ||||||
Federal funds purchased
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189 | - | ||||||
FHLB advances
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72,071 | 169,858 | ||||||
Junior subordinated debt
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199,353 | 280,226 | ||||||
Total interest expense
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1,632,759 | 2,209,582 | ||||||
Net interest income
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5,642,998 | 5,563,310 | ||||||
Provision for loan losses
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1,220,000 | 1,340,000 | ||||||
Net interest income after provision for loan losses
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4,422,998 | 4,223,310 | ||||||
Noninterest income:
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||||||||
Trust and brokerage fees
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884,000 | 882,966 | ||||||
Service charges
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290,850 | 290,386 | ||||||
Loan broker fees
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108,388 | 114,049 | ||||||
Gain on sale/calls of securities
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58,669 | 840 | ||||||
Other-than-temporary loss:
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||||||||
Total impairment loss
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(124,999 | ) | (18,844 | ) | ||||
Loss recognized in other comprehensive income
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- | 8,254 | ||||||
Net impairment loss recognized in earnings
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(124,999 | ) | (10,590 | ) | ||||
Other income
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430,305 | 320,043 | ||||||
Total noninterest income
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1,647,213 | 1,597,694 | ||||||
Noninterest expense:
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||||||||
Salaries and benefits
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2,559,082 | 2,387,076 | ||||||
Occupancy and equipment
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619,606 | 629,278 | ||||||
Marketing
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89,784 | 96,692 | ||||||
Data processing
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309,305 | 308,912 | ||||||
Loan and professional costs
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361,442 | 438,407 | ||||||
Office supplies and postage
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48,947 | 63,189 | ||||||
Courier services
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53,724 | 55,334 | ||||||
Business development
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90,619 | 79,008 | ||||||
Communication
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46,376 | 36,359 | ||||||
FDIC insurance premiums
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506,848 | 502,205 | ||||||
OREO Expenses
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191,920 | 55,797 | ||||||
Other expense
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215,054 | 252,909 | ||||||
Total noninterest expense
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5,092,707 | 4,905,166 | ||||||
Income before income taxes
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977,504 | 915,838 | ||||||
Income taxes expense
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194,861 | 194,802 | ||||||
Net income
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$ | 782,643 | $ | 721,036 |
The following notes are an integral part of the financial statements
Tower Financial Corporation
Consolidated Condensed Statements of Operations (Continued)
For the three months ended March 31, 2011 and 2010
(unaudited)
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||||||||
Three Months Ended
|
||||||||
March 31,
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||||||||
2011
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2010
|
|||||||
Net income:
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$ | 782,643 | $ | 721,036 | ||||
Other comprehensive income net of tax:
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||||||||
Unrealized appreciation on available for sale securities
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489,901 | 307,047 | ||||||
Total comprehensive income
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$ | 1,272,544 | $ | 1,028,083 | ||||
Basic earnings per common share
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$ | 0.16 | $ | 0.18 | ||||
Diluted earnings per common share
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$ | 0.16 | $ | 0.16 | ||||
Average common shares outstanding
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4,754,892 | 4,090,432 | ||||||
Average common shares and dilutive potential common shares outstanding
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4,852,761 | 4,394,419 | ||||||
Dividends declared per share
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$ | - | $ | - |
The following notes are an integral part of the financial statements
Tower Financial Corporation
For the three months ended March 31, 2011 and 2010 (unaudited)
Common
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Accumulated
|
|||||||||||||||||||||||
Stock and
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Other
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|||||||||||||||||||||||
Preferred
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Paid-in
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Retained
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Comprehensive
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Treasury
|
||||||||||||||||||||
Stock
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Capital
|
Earnings
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Income (Loss)
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Stock
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Total
|
|||||||||||||||||||
Balance, January 1, 2010
|
$ | 1,788,000 | $ | 39,835,648 | $ | 5,286,808 | $ | 910,029 | $ | (884,376 | ) | $ | 46,936,109 | |||||||||||
Net income for 2010
|
721,036 | 721,036 | ||||||||||||||||||||||
Other Comprehensive Income (See Note 4)
|
||||||||||||||||||||||||
307,047 | 307,047 | |||||||||||||||||||||||
Total Comprehensive Income
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1,028,083 | |||||||||||||||||||||||
Stock based compensation expense
|
11,728 | 11,728 | ||||||||||||||||||||||
Balance, March 31, 2010
|
$ | 1,788,000 | $ | 39,847,376 | $ | 6,007,844 | $ | 1,217,076 | $ | (884,376 | ) | $ | 47,975,920 | |||||||||||
Balance, January 1, 2011
|
$ | 757,213 | $ | 43,740,155 | $ | 8,450,579 | $ | 1,065,181 | $ | (884,376 | ) | $ | 53,128,752 | |||||||||||
Net income for 2011
|
782,643 | 782,643 | ||||||||||||||||||||||
Other Comprehensive Income (See Note 4)
|
||||||||||||||||||||||||
489,901 | 489,901 | |||||||||||||||||||||||
Total Comprehensive Income
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1,272,544 | |||||||||||||||||||||||
Stock based compensation expense
|
11,727 | 11,727 | ||||||||||||||||||||||
Conversion of 6,250 preferred shares into 103,820 common shares
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(610,655 | ) | 610,655 | - | ||||||||||||||||||||
Balance, March 31, 2011
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$ | 146,558 | $ | 44,362,537 | $ | 9,233,222 | $ | 1,555,082 | $ | (884,376 | ) | $ | 54,413,023 |
The following notes are an integral part of the financial statements
Tower Financial Corporation
For the three months ended March 31, 2011 and 2010
(unaudited)
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(unaudited)
|
|||||||
Three Months ended
|
Three Months ended
|
|||||||
March 31, 2011
|
March 31, 2010
|
|||||||
Cash flows from operating activities:
|
||||||||
Net income
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$ | 782,643 | $ | 721,036 | ||||
Adjustments to reconcile net income to net cash from operating activities:
|
||||||||
Depreciation and amortization
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489,628 | 359,942 | ||||||
Provision for loan losses
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1,220,000 | 1,340,000 | ||||||
Stock based compensation expense
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11,727 | 11,728 | ||||||
Earnings on life insurance
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(130,481 | ) | (115,280 | ) | ||||
Gain on sale of securities AFS
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(58,669 | ) | (840 | ) | ||||
Impairment on AFS securities
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124,999 | 10,590 | ||||||
Loans originated for sale
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(3,704,941 | ) | (5,539,352 | ) | ||||
(Gain)Loss on sale of other real estate owned
|
15,807 | 57 | ||||||
Proceeds from sale of loans
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5,413,400 | 8,350,674 | ||||||
Write-down on OREO
|
113,780 | - | ||||||
Change in accrued interest receivable
|
(94,957 | ) | (73,417 | ) | ||||
Change in other assets
|
72,461 | 1,064,963 | ||||||
Change in accrued interest payable
|
226,026 | 134,051 | ||||||
Change in other liabilities
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(590,986 | ) | (118,079 | ) | ||||
Net cash from operating activities
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3,890,437 | 6,146,073 | ||||||
Cash flows from investing activities:
|
||||||||
Net change in loans
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(5,414,160 | ) | 3,107,507 | |||||
Purchase of securities AFS
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(21,237,075 | ) | (5,761,030 | ) | ||||
Proceeds from calls and maturities of securities AFS
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7,284,120 | 5,373,220 | ||||||
Purchase of securities HTM
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- | (1,112,773 | ) | |||||
Proceeds from calls and maturities of securities HTM
|
- | 211,702 | ||||||
Proceeds from sale of securities AFS
|
783,300 | - | ||||||
Proceeds from sale of OREO
|
691,180 | 190,721 | ||||||
Purchase of bank owned life insurance
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(3,000,000 | ) | - | |||||
Purchase of FHLB stock
|
- | (75,000 | ) | |||||
Purchase of premises and equipment
|
(78,305 | ) | (449,523 | ) | ||||
Net cash from (used in) investing activities
|
(20,970,940 | ) | 1,484,824 | |||||
Cash flows from financing activities:
|
||||||||
Net change in deposits
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(830,733 | ) | (9,089,076 | ) | ||||
Repayment of long-term FHLB advances
|
(2,000,000 | ) | (2,000,000 | ) | ||||
Net change in short-term borrowings
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6,100,000 | 4,000,000 | ||||||
Net cash from (used in) financing activities
|
3,269,267 | (7,089,076 | ) | |||||
Net change in cash and cash equivalents
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(13,811,236 | ) | 541,821 | |||||
Cash and cash equivalents, beginning of period
|
29,679,382 | 24,664,309 | ||||||
Cash and cash equivalents, end of period
|
$ | 15,868,146 | $ | 25,206,130 | ||||
Supplemental disclosures of cash flow information
|
||||||||
Cash paid during the year for:
|
||||||||
Interest
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$ | 1,406,733 | $ | 2,075,531 | ||||
Income taxes
|
570,000 | - | ||||||
Noncash items:
|
||||||||
Transfer of loans to other real estate owned
|
1,277,095 | - |
The following notes are an integral part of the financial statements.
Tower Financial Corporation
Note 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements are filed for Tower Financial Corporation and its wholly-owned subsidiary, Tower Bank & Trust (or the “Bank” or “Tower Bank”), and two unconsolidated subsidiary guarantor trusts, Tower Capital Trust 2, and Tower Capital Trust 3. Also included are the Bank’s wholly-owned subsidiaries, Tower Trust Company (or the “Trust Company”) and Tower Capital Investments, which owns Tower Funding Corporation, a real estate investment trust.
The accompanying unaudited consolidated condensed financial statements were prepared in accordance with generally accepted accounting principles in the United States of America for interim periods and with instructions for Form 10-Q and, therefore, do not include all disclosures required by generally accepted accounting principles in the United States of America for complete presentation of the Company’s financial statements. In the opinion of management, the unaudited consolidated condensed financial statements contain all adjustments necessary to present fairly its consolidated financial position at March 31, 2011 and its consolidated results of operations and comprehensive income for the three-month periods ended March 31, 2011 and March 31, 2010 and change in stockholders’ equity and cashflows for the three-month periods ended March 31, 2011 and March 31, 2010. The results for the period ended March 31, 2011 should not be considered as indicative of results for a full year. These consolidated condensed financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2010 and 2009 and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Note 2 – Summary of Critical Accounting Policies
A comprehensive discussion of our critical accounting policies is disclosed in Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2010. Certain accounting policies require management to use estimates and make assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. There were no material changes in the information regarding our critical accounting policies since December 31, 2010.
Note 3 – Securities Available for Sale
The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at March 31, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein:
March 31, 2011
|
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Amortized
|
Gross Unrealized
|
Gross Unrealized
|
Fair
|
|||||||||||||
Cost
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Gains
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Losses
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Value
|
|||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agency debt obligations
|
$ | 3,392,750 | $ | 38,814 | $ | - | $ | 3,431,564 | ||||||||
Obligations of states and political subdivisions
|
49,102,804 | 871,471 | (430,765 | ) | 49,543,510 | |||||||||||
Mortgage-backed securities (residential)
|
64,353,606 | 2,005,925 | (316,416 | ) | 66,043,115 | |||||||||||
Mortgage-backed securities (commercial)
|
4,430,296 | 187,154 | - | 4,617,450 | ||||||||||||
Collateralized debt obligations
|
- | - | - | - | ||||||||||||
Total Securities
|
$ | 121,279,456 | $ | 3,103,364 | $ | (747,181 | ) | $ | 123,635,639 |
December 31, 2010
|
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Amortized
|
Gross Unrealized
|
Gross Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agency debt obligations
|
$ | 4,112,957 | $ | 59,710 | $ | - | $ | 4,172,667 | ||||||||
Obligations of states and political subdivisions
|
45,852,349 | 546,212 | (639,159 | ) | 45,759,402 | |||||||||||
Mortgage-backed securities (residential)
|
53,960,788 | 1,854,148 | (325,966 | ) | 55,488,970 | |||||||||||
Mortgage-backed securities (commercial)
|
4,458,652 | 224,365 | - | 4,683,017 | ||||||||||||
Collateralized debt obligations
|
110,000 | - | (105,400 | ) | 4,600 | |||||||||||
Total Securities
|
$ | 108,494,746 | $ | 2,684,435 | $ | (1,070,525 | ) | $ | 110,108,656 |
Total other-than-temporary impairment recognized in accumulated other comprehensive income was $157,282 and $274,596 for securities available for sale at March 31, 2011 and December 31, 2010, respectively.
The fair values of debt securities available for sale at March 31, 2011 and December 31, 2010, by contractual maturity, are shown below. Securities not due at a single date, primarily mortgage-backed securities, are shown separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
3/31/2011
|
||||||||||||
Weighted Average
|
Amortized
|
Fair
|
||||||||||
Yield
|
Cost
|
Value
|
||||||||||
Available for sale securities:
|
||||||||||||
Agencies:
|
||||||||||||
Due after one to five years
|
2.16 | % | $ | 799,208 | $ | 816,104 | ||||||
Due after five to ten years
|
2.58 | % | 2,593,542 | 2,615,460 | ||||||||
Total Agencies
|
2.48 | % | $ | 3,392,750 | $ | 3,431,564 | ||||||
Mortgage-backed securities:
|
||||||||||||
Mortgage-backed securities (residential)
|
2.96 | % | $ | 64,353,606 | $ | 66,043,115 | ||||||
Mortgage-backed securities (commercial)
|
4.37 | % | 4,430,296 | 4,617,450 | ||||||||
3.05 | % | $ | 68,783,902 | $ | 70,660,565 | |||||||
Obligations of state and political subdivisions:
|
||||||||||||
Due in one year or less
|
4.99 | % | $ | 130,109 | $ | 130,709 | ||||||
Due after one to five years
|
5.41 | % | 3,835,225 | 3,967,328 | ||||||||
Due after five to ten years
|
5.33 | % | 15,951,711 | 16,254,156 | ||||||||
Due after ten years
|
5.69 | % | 29,185,759 | 29,191,317 | ||||||||
Total Obligations of state and political subdivisions
|
5.55 | % | $ | 49,102,804 | $ | 49,543,510 | ||||||
Collateralized debt obligations
|
||||||||||||
Due after ten years
|
0.00 | % | $ | - | $ | - |
12/31/2010
|
||||||||||||
Weighted
|
||||||||||||
Average
|
Amortized
|
Fair
|
||||||||||
Yield
|
Cost
|
Value
|
||||||||||
Available for sale securities:
|
||||||||||||
Agencies:
|
||||||||||||
Due in one year or less
|
3.25 | % | $ | 700,000 | $ | 703,997 | ||||||
Due after one to five years
|
2.16 | % | 799,138 | 822,336 | ||||||||
Due after five to ten years
|
2.58 | % | 2,613,819 | 2,646,334 | ||||||||
Total Agencies
|
2.61 | % | $ | 4,112,957 | $ | 4,172,667 | ||||||
Mortgage-backed securities:
|
||||||||||||
Mortgage-backed securities (residential)
|
3.86 | % | $ | 53,960,788 | $ | 55,488,970 | ||||||
Mortgage-backed securities (commercial)
|
4.22 | % | 4,458,652 | 4,683,017 | ||||||||
3.89 | % | $ | 58,419,440 | $ | 60,171,987 | |||||||
Obligations of state and political subdivisions:
|
||||||||||||
Due in one year or less
|
4.99 | % | $ | 260,457 | $ | 262,621 | ||||||
Due after one to five years
|
5.24 | % | 3,168,388 | 3,270,587 | ||||||||
Due after five to ten years
|
5.28 | % | 13,676,918 | 13,820,407 | ||||||||
Due after ten years
|
5.77 | % | 28,746,586 | 28,405,787 | ||||||||
Total Obligations of state and political subdivisions
|
5.58 | % | $ | 45,852,349 | $ | 45,759,402 | ||||||
Collateralized debt obligations
|
||||||||||||
Due after ten years
|
1.15 | % | $ | 110,000 | $ | 4,600 |
Proceeds from securities sold classified as available for sale totaled $783,300 for the three months ended March 31, 2011. There were no securities sold for the three months ended March 31, 2010.
Gross gains realized were $58,879 and $840 for the three months ended March 31, 2011 and March 31, 2010, respectively. There were $210 and $0 gross losses realized on the sale of available for sale securities during the three-month periods ending March 31, 2011 and March 31, 2010. The approximate tax expense on the net gains (losses) for the three months ended March 31, 2011 and March 31, 2010 was $19,947 and $286, respectively.
Securities with a carrying value of $1.0 million and $1.1 million were pledged to secure borrowings from the FHLB at March 31, 2011 and December 31, 2010, respectively. Securities with a carrying value of $3.2 million and $4.2 million were pledged to the Federal Reserve to secure potential borrowings at the Discount Window at March 31, 2011 and December 31, 2010, respectively. Securities with a carrying value of $17.9 million and $17.8 million were pledged at correspondent banks, including Wells Fargo, First Tennessee, First Merchants and Pacific Coast Bankers Bank, to secure federal funds lines of credit at March 31, 2011 and December 31, 2010, respectively. At March 31, 2011, there were no holdings of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders' equity.
Securities with unrealized losses at March 31, 2011 not recognized in income are as follows:
Continuing Unrealized
|
Continuing Unrealized
|
|||||||||||||||||||||||
Losses for
|
Losses for
|
|||||||||||||||||||||||
Less than 12 months
|
More than 12 months
|
Total
|
||||||||||||||||||||||
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
|||||||||||||||||||
Available for sale securities:
|
||||||||||||||||||||||||
U.S. Government agency debt obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Obligations of states and political subdivisions
|
12,068,080 | (404,976 | ) | 1,449,442 | (25,789 | ) | 13,517,522 | (430,765 | ) | |||||||||||||||
Mortgage-backed securities (residential)
|
15,906,979 | (159,133 | ) | 401,717 | (157,283 | ) | 16,308,696 | (316,416 | ) | |||||||||||||||
Mortgage-backed securities (commercial)
|
- | - | - | - | - | - | ||||||||||||||||||
Collateralized debt obligations
|
- | - | - | - | - | - | ||||||||||||||||||
Total temporarily impaired securities
|
$ | 27,975,059 | $ | (564,109 | ) | $ | 1,851,159 | $ | (183,072 | ) | $ | 29,826,218 | $ | (747,181 | ) |
Securities with unrealized losses at December 31, 2010 not recognized in income are as follows:
Continuing Unrealized
|
Continuing Unrealized
|
|||||||||||||||||||||||
Losses for
|
Losses for
|
|||||||||||||||||||||||
Less than 12 months
|
More than 12 months
|
Total
|
||||||||||||||||||||||
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
|||||||||||||||||||
Available for sale securities:
|
||||||||||||||||||||||||
U.S. Government agency debt obligations
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Obligations of states and political subdivisions
|
16,033,664 | (588,556 | ) | 1,427,946 | (50,603 | ) | 17,461,610 | (639,159 | ) | |||||||||||||||
Mortgage-backed securities (residential)
|
5,772,263 | (156,769 | ) | 416,929 | (169,197 | ) | 6,189,192 | (325,966 | ) | |||||||||||||||
Mortgage-backed securities (commercial)
|
- | - | - | - | - | - | ||||||||||||||||||
Collateralized debt obligations
|
- | - | 4,600 | (105,400 | ) | 4,600 | (105,400 | ) | ||||||||||||||||
Total available for sale securities
|
$ | 21,805,927 | $ | (745,325 | ) | $ | 1,849,475 | $ | (325,200 | ) | $ | 23,655,402 | $ | (1,070,525 | ) |
Unrealized losses on mortgage-backed securities and state and municipality bonds have not been recognized into income because the issuers’ bonds are of high credit quality and management does not have the intent to sell and it is likely that they will not be required to sell the securities before their anticipated recovery. The fair value is expected to recover as the bonds approach their maturity and/or as market conditions improve.
As of March 31, 2011, Tower Financial Corporation’s security portfolio consisted of 230 securities, 40 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s mortgage-backed securities, as discussed below:
Mortgage-backed Securities
At March 31, 2011, approximately 82% of the mortgage-backed securities we held were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in market value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.
As of March 31, 2011, we held $11.8 million of non-agency backed CMO investments. These investments were purchased as loan alternatives. The eight securities purchased all had AAA rating from Standard & Poors. These bonds make up less than 10% of capital. The Company continues to monitor these securities and obtain current market prices at least on a quarterly basis. Based on this review, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.
Private Label Collateralized Mortgage Obligation
The Company owns a Private Label Collateralized Mortgage Obligation (CMO) with an original investment of $1.0 million. At March 31, 2011, the fair value of the investment was $401,717 and the amortized cost was $558,999. The investment was rated Caa2 by Moody’s and CCC by S&P. At December 31, 2010, the fair value of the investment was $416,929 and the amortized cost was $586,125.
This bond is classified as a “super senior” tranche because its cash flow is not subordinated to any other tranche in the deal and is classified as a mortgage-backed security (residential). We used the Intex database to evaluate and model each individual loan in the underlying collateral of this security. In 2009, we noticed that the credit quality of the underlying collateral was marginally deteriorating causing us to more aggressively monitor and analyze for other-than-temporary-impairment. To monitor this investment, management has evaluated loan delinquencies, foreclosures, other real estate owned (OREO) and bankruptcies as a percentage of principal remaining on the loans as shown in the table below prior to making assumptions on the performing loans.
March 31
|
December 31
|
September 30
|
June 30
|
March 31
|
||||||||||||||||
2011
|
2010
|
2010
|
2010
|
2010
|
||||||||||||||||
Delinquency 60+
|
25.16 | % | 22.58 | % | 20.76 | % | 22.48 | % | 24.37 | % | ||||||||||
Delinquency 90+
|
22.36 | % | 19.79 | % | 18.42 | % | 20.73 | % | 22.07 | % | ||||||||||
Other Real Estate Owned
|
2.58 | % | 1.73 | % | 0.20 | % | 0.17 | % | 1.27 | % | ||||||||||
Foreclosure
|
10.70 | % | 9.42 | % | 9.11 | % | 10.79 | % | 11.43 | % | ||||||||||
Bankruptcy
|
3.08 | % | 4.08 | % | 4.09 | % | 3.35 | % | 3.87 | % |
We utilized Intex data to determine the default assumptions for all loans that are classified as “past due,” OREO or in foreclosure. A 50% severity rate was assumed on all defaults. This number was derived from the pool average over the last 12 months. The default rate differs for each State based on the severity of that State’s home price depreciation and the number of days the loan is past due. Any foreclosure or loan classified as other real estate owned is immediately liquidated at a 50% severity. The current loan category is stratified by FICO scores and the level of asset documentation (full documentation, low documentation, or no documentation). The Loan Performance Database driven by Intex data is mined for historical probabilities of loans meeting these characteristics moving into default. This was done for loans originated in 2006, 2007, and 2008 periods. The average default rate is then calculated, as well as its standard deviation. Two standard deviations are then added to this mean to derive the current loan CDR assumptions; representing what management feels is a “stressed” scenario. We used the yield at the time of purchase as the discount rate for the cash flow analysis. At the time of purchase the bond was yielding 6%. Therefore, all cash flows in the OTTI analysis were discounted by 6% to get a present value. To determine the fair value, we surveyed two bond desks to see what yield it would take to sell the bond in the open market. Both desks said it would take a yield of 12%-15% to get someone to buy this bond. Management decided to use the conservative figure and discounted the cash flows by 15%. The two bond desks that were surveyed are Sterne Agee and Performance Trust.
Based on the analysis performed using the assumptions above, we have determined that this Private Label CMO is other-than-temporarily-impaired requiring us to record total credit impairment of $72,730 through March 31, 2011. We had previously recorded impairment of $57,731 as of December 31, 2010, therefore an OTTI charge of $14,999 was recorded during the first three months of 2011.
Trust Preferred Securities
The Company, through the Bank’s investment subsidiary, owns a $1 million original investment in PreTSL XXV out of a pooled $877.4 million investment at the time of purchase. This is the Company’s only pooled trust preferred security and it is classified as a collateralized debt obligation. At March 31, 2011, the Company took an additional OTTI charge to write-off the remaining investment. At December 31, 2010, the fair value of the investment was $4,600 and the amortized cost was $110,000. The investment was rated Ca by Moody’s and C by Fitch at March 31, 2011 and December 31, 2010.
The investment is divided into seven tranches. Tower’s investment is in the fifth tranche (C-1), meaning the cashflows on the investment are subordinated to the higher placed tranches. There are sixty-eight (68) issuing participants in PreTSL XXV. Fifty-eight (58) of the issuers are banks or bank holding companies, with the remaining issuers being insurance companies. As of March 31, 2011, the amount of deferrals and defaults was $326.6 million, or 37% of the total pool. Of the total $877.4 million of original collateral, $550.8 million is currently paying interest. The defaults and deferrals occurred as follows:
Deferral
|
Default
|
|||||||
March 31, 2008
|
$ | - | $ | 25,000,000 | ||||
September 30, 2008
|
20,000,000 | - | ||||||
December 31, 2008
|
15,000,000 | 35,000,000 | ||||||
March 31, 2009
|
22,500,000 | - | ||||||
June 30, 2009
|
35,600,000 | 25,000,000 | ||||||
September 30, 2009
|
86,000,000 | - | ||||||
December 31, 2009*
|
7,500,000 | 25,000,000 | ||||||
March 31, 2010
|
- | - | ||||||
June 30, 2010
|
- | - | ||||||
September 30, 2010
|
14,000,000 | - | ||||||
December 31, 2010
|
29,000,000 | - | ||||||
March 31, 2011
|
12,000,000 | - |
*$25.0 million of defaults at December 31, 2009 were reported as deferrals in September 30, 2009
The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the period. The OTTI model considers the structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimates of expected cash flows are based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying loans or trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume that all interest payment deferrals will become defaults prior to their next payment dates and that there will be no recoveries on defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Tower’s note class. We evaluate the credit quality of each underlying issuer in the pool and apply a risk rating for each issuer and then put this risk rating into a relevant risk model to identify immediate default risk. Upon completion of the March 31, 2011 analysis, our model indicated that the security was other-than-temporarily impaired. Based on this conclusion at March 31, 2011, the investment had OTTI of 100%. The March 31, 2011 OTTI charge was $110,000 resulting in an ending book value of $0. This security cannot experience any additional OTTI charges.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the three months ended March 31, 2011:
For the three months ended March 31
|
2011
|
2010
|
||||||
Beginning Balance, January 1
|
$ | 909,073 | $ | 750,770 | ||||
Additions for amounts related to credit loss for which an OTTI was not previously recognized
|
- | - | ||||||
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized
|
124,999 | 10,590 | ||||||
Ending Balance, March 31
|
$ | 1,034,072 | $ | 761,360 |
Note 4 – Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (“OCI”). Other comprehensive income includes unrealized gains and losses on securities available-for-sale. Following is a summary of other comprehensive income for the three months ended March 31, 2011 and 2010:
Three months ended March 31,
|
||||||||
2011
|
2010
|
|||||||
Net Income
|
$ | 782,643 | $ | 721,036 | ||||
Change in securities available for sale:
|
||||||||
Unrealized holding gains (losses) on securities for which other-than-temporary impairment has been recorded
|
(7,685 | ) | (18,844 | ) | ||||
Other-than-temporary impairment on available for sale securities associated with credit losses realized in income
|
124,999 | 10,590 | ||||||
Unrealized holding gains (losses) recorded in other comprehensive income
|
117,314 | (8,254 | ) | |||||
Unrealized holding gains (losses) on available for sale securities arising during the period
|
683,629 | 474,317 | ||||||
Reclassification adjustment for (gains) losses realized in income on available for sale securities
|
(58,669 | ) | (840 | ) | ||||
Net unrealized gains (losses)
|
624,960 | 473,477 | ||||||
Income tax expense
|
252,373 | 158,176 | ||||||
Total other comprehensive income
|
489,901 | 307,047 | ||||||
Comprehensive Income
|
$ | 1,272,544 | $ | 1,028,083 |
Note 5 - Earnings Per Share
The following table reflects the calculation of basic and diluted earnings per common share for the three-month periods ended March 31, 2011 and March 31, 2010. Options not considered in the calculation of diluted earnings per common share because they were antidilutive, totaled 74,654 and 79,404 for the three-month period ended March 31, 2011 and 2010, respectively. The Company also has preferred stock which can be converted at the option of the shareholders into 24,917 and 303,987 shares of common stock as of March 31, 2011 and 2010, respectively.
Three Months Ended
|
||||||||
March 31,
|
||||||||
2011
|
2010
|
|||||||
Basic
|
||||||||
Net income available to common stockholders
|
$ | 782,643 | $ | 721,036 | ||||
Weighted average common shares outstanding
|
4,754,892 | 4,090,432 | ||||||
Basic earnings per common share
|
$ | 0.16 | $ | 0.18 | ||||
Diluted
|
||||||||
Net income available to common stockholders
|
$ | 782,643 | $ | 721,036 | ||||
Weighted average common shares outstanding
|
4,754,892 | 4,090,432 | ||||||
Add: dilutive effect of assumed preferred stock conversion and stock options
|
97,869 | 303,987 | ||||||
Weighted average common shares and dilutive potential common shares outstanding and preferred stock conversion
|
4,852,761 | 4,394,419 | ||||||
Diluted earnings per common share
|
$ | 0.16 | $ | 0.16 |
Note 6 – Equity Incentive Plans
Options to buy stock were previously granted to directors, officers and employees under the 1998 and 2001 Stock Option and Incentive Plans (the “Plans”), which together provided for issuance of up to 435,000 shares of common stock of the Company. Options for all 435,000 shares were issued under the Plans, of which 74,654 remain outstanding as of March 31, 2011. Option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of each grant, vesting over a four-year period, and issued with a ten-year contractual term. There was no compensation cost charged against income for options granted under the Plans in accordance with accounting standards for the three months ended March 31, 2011 and March 31, 2010. No income tax benefit was recognized in the income statement for the share-based compensation arrangements.
A summary of the option activity under the Plans as of March 31, 2011 and changes during the three-month period then ended are presented below:
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Aggregate
|
Remaining
|
|||||||||||||||
|
Exercise
|
Contractual
|
Instrinsic
|
|||||||||||||
Options
|
Shares
|
Price
|
Term
|
Value
|
||||||||||||
Outstanding at January 1, 2011
|
76,154 | $ | 13.37 | 2.72 | $ | - | ||||||||||
|
||||||||||||||||
Granted
|
- | - | - | - | ||||||||||||
|
||||||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
|
||||||||||||||||
Forfeited or expired
|
(1,500 | ) | 8.38 | - | - | |||||||||||
|
||||||||||||||||
Outstanding at March 31, 2011
|
74,654 | 13.47 | 2.52 | - | ||||||||||||
|
||||||||||||||||
Vested or expected to vest at March 31, 2011
|
74,654 | 13.47 | 2.52 | - | ||||||||||||
|
||||||||||||||||
Exercisable at March 31, 2011
|
74,654 | 13.47 | 2.52 | - |
No further options will be granted under either of these Plans, but the plans will remain in effect for purposes of administering already existing options previously granted and still outstanding under the Plans. As of March 31, 2011 there was no unrecognized compensation expense for the 1998 and 2001 Stock Options plan.
On April 19, 2006, at our annual meeting of stockholders, stockholders approved Tower Financial Corporation’s 2006 Equity Incentive Plan, under which 150,000 shares have been reserved for issuance as incentive stock options, nonstatutory stock options, restricted stock awards, unrestricted stock awards, performance awards, or stock appreciation rights. As of March 31, 2011, 19,500 shares have been granted in the form of restricted stock, of which 10,750 shares have vested. The compensation cost that has been charged against income for restricted shares awarded under the Plan was $11,727 and $11,728 for the three months ended March 31, 2011 and 2010, respectively. Future expense related to this award will be $35,183 in 2011 and $14,062 in 2012. The total fair value of shares vested during the quarter ended March 31, 2011 was $7,750.
A summary of the restricted stock activity as of March 31, 2011 and changes during the three-month period then ended are presented below:
Weighted-Average
|
||||||||
|
Grant-Date
|
|||||||
Restricted Stock
|
Shares
|
Fair Value
|
||||||
|
||||||||
Outstanding at January 1, 2011
|
9,750 | $ | 8.95 | |||||
|
||||||||
Granted
|
- | - | ||||||
|
||||||||
Vested
|
(1,000 | ) | 6.58 | |||||
|
||||||||
Forfeited
|
- | - | ||||||
|
||||||||
Outstanding at March 31, 2011
|
8,750 | 9.22 |
Note 7 – Business Segments
Management separates Tower Financial Corporation into three distinct businesses for reporting purposes. The three segments are Banking, Wealth Management, and Corporate and Intercompany. The segments are evaluated separately on their individual performance, as well as their contribution as a whole.
The majority of assets and income result from the Banking segment. The Bank is a full-service commercial bank with six Allen County locations and one Warsaw location. The Wealth Management segment is made up of Tower Trust Company. The Trust Company provides estate planning, investment management, and retirement planning, as well as investment brokerage services. The Corporate and Intercompany segment includes the holding company and subordinated debentures. We incur general corporate expenses, as well as interest expense on the subordinated debentures.
Information reported internally for performance assessment follows:
As of and for the three months ending March 31, 2011
|
||||||||||||||||||||
Wealth
|
Corporate &
|
|||||||||||||||||||
Bank
|
Management
|
Intercompany
|
Eliminations
|
Total
|
||||||||||||||||
Income Statement Information
|
||||||||||||||||||||
Net interest income
|
$ | 5,820,305 | $ | 22,046 | $ | (199,353 | ) | $ | - | $ | 5,642,998 | |||||||||
Non-interest income
|
754,927 | 886,039 | 1,043,801 | (1,037,554 | ) | 1,647,213 | ||||||||||||||
Non-interest expense
|
4,289,994 | 609,592 | 193,121 | - | 5,092,707 | |||||||||||||||
Noncash items
|
||||||||||||||||||||
Provision for loan losses
|
1,220,000 | - | - | - | 1,220,000 | |||||||||||||||
Depreciation/Amortization
|
476,435 | 13,193 | - | - | 489,628 | |||||||||||||||
Income tax expense(benefit)
|
226,572 | 99,605 | (131,316 | ) | - | 194,861 | ||||||||||||||
Segment Profit
|
838,666 | 198,888 | 782,643 | (1,037,554 | ) | 782,643 | ||||||||||||||
Balance Sheet Information
|
||||||||||||||||||||
Segment Assets
|
658,382,461 | 6,648,921 | 78,009,855 | (78,924,404 | ) | 664,116,833 |
As of for the three months ending March 31, 2010
|
||||||||||||||||||||
Wealth
|
Corporate &
|
|||||||||||||||||||
Bank
|
Management
|
Intercompany
|
Eliminations
|
Total
|
||||||||||||||||
Income Statement Information
|
||||||||||||||||||||
Net interest income
|
$ | 5,827,267 | $ | 16,269 | $ | (280,226 | ) | $ | - | $ | 5,563,310 | |||||||||
Non-interest income
|
900,819 | 886,732 | 1,011,249 | (1,201,106 | ) | 1,597,694 | ||||||||||||||
Non-interest expense
|
4,150,734 | 599,282 | 155,150 | - | 4,905,166 | |||||||||||||||
Noncash items
|
||||||||||||||||||||
Provision for loan losses
|
1,340,000 | - | - | - | 1,340,000 | |||||||||||||||
Depreciation/Amortization
|
350,845 | 9,097 | - | - | 359,942 | |||||||||||||||
Income tax expense(benefit)
|
234,529 | 105,436 | (145,163 | ) | - | 194,802 | ||||||||||||||
Segment Profit
|
1,002,823 | 198,283 | 721,036 | (1,201,106 | ) | 721,036 | ||||||||||||||
Balance Sheet Information
|
||||||||||||||||||||
Segment Assets
|
676,696,637 | 5,935,873 | 70,543,441 | (79,050,186 | ) | 674,125,765 |
Note 8 – Loans and Allowance for Loan Losses
Loans at March 31, 2011 and December 31, 2010 were as follows:
|
March 31, 2011
|
December 31, 2010
|
||||||||||||||
|
Balance
|
%
|
Balance
|
%
|
||||||||||||
|
||||||||||||||||
Commercial
|
$ | 235,880,318 | 48.2 | % | $ | 233,882,777 | 48.0 | % | ||||||||
Commercial real estate
|
||||||||||||||||
Construction
|
25,890,839 | 5.3 | % | 24,588,088 | 5.1 | % | ||||||||||
Other
|
95,329,531 | 19.5 | % | 94,056,119 | 19.3 | % | ||||||||||
Residential real estate
|
||||||||||||||||
Traditional
|
52,163,061 | 10.7 | % | 54,236,553 | 11.1 | % | ||||||||||
Jumbo
|
29,467,708 | 6.0 | % | 25,833,656 | 5.3 | % | ||||||||||
Home equity
|
35,688,855 | 7.3 | % | 38,395,005 | 7.9 | % | ||||||||||
Consumer
|
14,919,453 | 3.0 | % | 15,979,973 | 3.3 | % | ||||||||||
Total loans
|
489,339,765 | 100.0 | % | 486,972,171 | 100.0 | % | ||||||||||
Net deferred loan costs (fees)
|
(90,190 | ) | (58,056 | ) | ||||||||||||
Allowance for loan losses
|
(11,907,795 | ) | (12,489,400 | ) | ||||||||||||
Net loans
|
$ | 477,341,780 | $ | 474,424,715 |
The following tables summarize changes in the Company’s allowance for loan losses for the periods indicated:
For the three months ended March 31, 2011:
Commercial
|
Commercial Real Estate
|
Residential Real Estate
|
Home Equity
|
Consumer
|
Unallocated
|
Total
|
||||||||||||||||||||||
Beginning balance 1/1/2011
|
5,790,945 | 6,183,365 | 386,992 | 77,051 | 28,711 | 22,336 | 12,489,400 | |||||||||||||||||||||
Provision expense
|
1,377,219 | (91,840 | ) | (70,458 | ) | 18,457 | (5,367 | ) | (8,011 | ) | 1,220,000 | |||||||||||||||||
Charge-offs
|
(822,867 | ) | (1,049,110 | ) | - | (17,408 | ) | - | - | (1,889,385 | ) | |||||||||||||||||
Recoveries
|
37,075 | 47,363 | - | 1,767 | 1,575 | - | 87,780 | |||||||||||||||||||||
Ending Balance 3/31/2011
|
6,382,372 | 5,089,778 | 316,534 | 79,867 | 24,919 | 14,325 | 11,907,795 |
For the three months ended March 31, 2010:
Beginning balance 1/1/2010
|
11,598,389 | |||
Provision expense
|
1,340,000 | |||
Charge-offs
|
(812,446 | ) | ||
Recoveries
|
23,942 | |||
Ending Balance 3/31/2010
|
12,149,885 |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2011 and December 31, 2010:
March 31, 2011
|
Individually evaluated for impairment
|
Collectively evaluated for impairment
|
Total
|
|||||||||
Allowance for loan losses: | ||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||
Commercial
|
$ | 1,361,920 | $ | 5,020,452 | $ | 6,382,372 | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
1,467,000 | 651,318 | 2,118,318 | |||||||||
Other
|
585,000 | 2,386,460 | 2,971,460 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | 202,269 | 202,269 | |||||||||
Jumbo
|
- | 114,265 | 114,265 | |||||||||
Home Equity
|
- | 79,867 | 79,867 | |||||||||
Consumer
|
- | 24,919 | 24,919 | |||||||||
Unallocated
|
- | 14,325 | 14,325 | |||||||||
Total
|
$ | 3,413,920 | $ | 8,493,875 | $ | 11,907,795 | ||||||
Loans:
|
||||||||||||
Commercial
|
$ | 16,971,628 | $ | 219,617,138 | $ | 236,588,766 | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
6,367,965 | 19,574,159 | 25,942,124 | |||||||||
Other
|
6,085,261 | 89,420,950 | 95,506,211 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | 52,266,252 | 52,266,252 | |||||||||
Jumbo
|
- | 29,526,003 | 29,526,003 | |||||||||
Home Equity
|
- | 35,909,221 | 35,909,221 | |||||||||
Consumer
|
- | 15,123,879 | 15,123,879 | |||||||||
Unallocated
|
- | - | - | |||||||||
Total
|
$ | 29,424,854 | $ | 461,437,602 | $ | 490,862,456 |
December 31, 2010
|
Individually evaluated for impairment
|
Collectively evaluated for impairment
|
Total
|
|||||||||
Allowance for loan losses:
|
||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||
Commercial
|
$ | 794,796 | $ | 4,996,149 | $ | 5,790,945 | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
2,547,000 | 664,665 | 3,211,665 | |||||||||
Other
|
445,000 | 2,526,700 | 2,971,700 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | 262,134 | 262,134 | |||||||||
Jumbo
|
- | 124,858 | 124,858 | |||||||||
Home Equity
|
- | 77,051 | 77,051 | |||||||||
Consumer
|
- | 28,711 | 28,711 | |||||||||
Unallocated
|
- | 22,336 | 22,336 | |||||||||
Total
|
$ | 3,786,796 | $ | 8,702,604 | $ | 12,489,400 | ||||||
Loans:
|
||||||||||||
Commercial
|
$ | 17,755,408 | $ | 216,751,782 | $ | 234,507,190 | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
8,020,168 | 16,632,723 | 24,652,891 | |||||||||
Other
|
5,853,845 | 88,362,580 | 94,216,425 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | 54,373,838 | 54,373,838 | |||||||||
Jumbo
|
- | 25,899,046 | 25,899,046 | |||||||||
Home Equity
|
- | 38,620,639 | 38,620,639 | |||||||||
Consumer
|
- | 16,186,219 | 16,186,219 | |||||||||
Unallocated
|
- | - | - | |||||||||
Total
|
$ | 31,629,421 | $ | 456,826,827 | $ | 488,456,248 |
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010:
March 31, 2011
|
Unpaid Principal Balance
|
Recorded Investment
|
Allowance for Loan Losses Allocated
|
|||||||||
With no related allowance recorded:
|
||||||||||||
Commercial
|
$ | 11,815,368 | $ | 11,842,016 | $ | - | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
1,314,369 | 1,314,913 | - | |||||||||
Other
|
1,475,872 | 1,482,866 | - | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | - | - | |||||||||
Jumbo
|
- | - | - | |||||||||
Home Equity
|
- | - | - | |||||||||
Consumer
|
- | - | - | |||||||||
14,605,609 | 14,639,795 | - | ||||||||||
With related allowance recorded:
|
||||||||||||
Commercial
|
5,120,215 | 5,129,612 | 1,361,920 | |||||||||
Commercial Real Estate
|
||||||||||||
Construction
|
5,051,275 | 5,053,052 | 1,467,000 | |||||||||
Other
|
4,598,566 | 4,602,395 | 585,000 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | - | - | |||||||||
Jumbo
|
- | - | - | |||||||||
Home Equity
|
- | - | - | |||||||||
Consumer
|
- | - | - | |||||||||
14,770,056 | 14,785,059 | 3,413,920 | ||||||||||
$ | 29,375,665 | $ | 29,424,854 | $ | 3,413,920 |
December 31, 2010
|
Unpaid Principal Balance
|
Recorded Investment
|
Allowance for Loan Losses Allocated
|
|||||||||
With no related allowance recorded:
|
||||||||||||
Commercial
|
$ | 12,803,552 | $ | 12,826,772 | $ | - | ||||||
Commercial Real Estate
|
||||||||||||
Construction
|
1,850,416 | 1,862,150 | - | |||||||||
Other
|
2,208,130 | 2,208,205 | - | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | - | - | |||||||||
Jumbo
|
- | - | - | |||||||||
Home Equity
|
- | - | - | |||||||||
Consumer
|
- | - | - | |||||||||
16,862,098 | 16,897,127 | - | ||||||||||
With related allowance recorded:
|
||||||||||||
Commercial
|
4,910,918 | 4,928,636 | 794,796 | |||||||||
Commercial Real Estate
|
||||||||||||
Construction
|
6,156,859 | 6,158,018 | 2,547,000 | |||||||||
Other
|
3,640,193 | 3,645,640 | 445,000 | |||||||||
Residential Real Estate
|
||||||||||||
Traditional
|
- | - | - | |||||||||
Jumbo
|
- | - | - | |||||||||
Home Equity
|
- | - | - | |||||||||
Consumer
|
- | - | - | |||||||||
14,707,970 | 14,732,294 | 3,786,796 | ||||||||||
$ | 31,570,068 | $ | 31,629,421 | $ | 3,786,796 |
The following tables present the average impaired loans, interest recognized on impaired loans, and cash-basis interest income recognized on impaired loans for the three months ended March 31, 2011 and March 31, 2010:
For the three months ended
|
March 31, 2011
|
||||
Average impaired loans during the period:
|
|||||
Commercial
|
$ | 15,987,011 | |||
Commercial Real Estate
|
|||||
Construction
|
3,560,177 | ||||
Other
|
11,015,678 | ||||
Interest recognized on impaired loans:
|
|||||
Commercial
|
159,397 | ||||
Commercial Real Estate
|
|||||
Construction
|
47,245 | ||||
Other
|
70,047 | ||||
Cash-basis interest income recognized:
|
|||||
Commercial
|
134,391 | ||||
Commercial Real Estate
|
|||||
Construction
|
43,318 | ||||
Other
|
64,577 |
For the three months ended
|
March 31, 2010
|
||||
Average impaired loans during the period
|
$ | 25,396,342 | |||
Interest recognized on impaired loans
|
178,971 | ||||
Cash-basis interest income recognized
|
178,971 |
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2011 and December 31, 2010:
March 31, 2011
|
Nonaccrual
|
Loans Past Due Over 90 Days Still Accruing
|
||||||
Commercial
|
$ | 7,581,886 | $ | 1,897,231 | ||||
Commercial Real Estate
|
||||||||
Construction
|
3,306,335 | - | ||||||
Other
|
1,197,890 | 678,007 | ||||||
Residential Real Estate
|
||||||||
Traditional
|
651,925 | 183,512 | ||||||
Jumbo
|
- | - | ||||||
Home Equity
|
- | 118,341 | ||||||
Consumer
|
- | 7,352 | ||||||
Total
|
$ | 12,738,036 | $ | 2,884,443 |
December 31, 2010
|
Nonaccrual
|
Loans Past Due Over 90 Days Still Accruing
|
||||||
Commercial
|
$ | 6,413,675 | $ | 1,961,597 | ||||
Commercial Real Estate
|
||||||||
Construction
|
3,476,643 | 482,512 | ||||||
Other
|
2,208,205 | - | ||||||
Residential Real Estate
|
||||||||
Traditional
|
825,432 | 229,213 | ||||||
Jumbo
|
- | - | ||||||
Home Equity
|
17,292 | 179 | ||||||
Consumer
|
- | 27,843 | ||||||
Total
|
$ | 12,941,247 | $ | 2,701,344 |
The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010:
March 31, 2011
|
30 - 59 Days Past Due
|
60 - 89 Days Past Due
|
Greater than 90 Days Past Due
|
Total Past Due
|
Total Loans Not Past Due
|
|||||||||||||||
Commercial
|
$ | 1,824,016 | $ | 4,304,047 | $ | 4,639,386 | 10,767,449 | $ | 225,821,317 | |||||||||||
Commercial Real Estate
|
||||||||||||||||||||
Construction
|
2,596,702 | - | 3,167,098 | 5,763,800 | 20,178,324 | |||||||||||||||
Other
|
749,663 | 132,249 | 1,875,897 | 2,757,809 | 92,748,402 | |||||||||||||||
Residential Real Estate
|
||||||||||||||||||||
Traditional
|
60,156 | - | 835,437 | 895,593 | 51,370,659 | |||||||||||||||
Jumbo
|
- | - | - | - | 29,526,003 | |||||||||||||||
Home Equity
|
41,487 | - | 118,341 | 159,828 | 35,749,393 | |||||||||||||||
Consumer
|
335,817 | 49,303 | 7,352 | 392,472 | 14,731,407 | |||||||||||||||
Total
|
$ | 5,607,841 | $ | 4,485,599 | $ | 10,643,511 | $ | 20,736,951 | $ | 470,125,505 |
December 31, 2010
|
30 - 59 Days Past Due
|
60 - 89 Days Past Due
|
Greater than 90 Days Past Due
|
Total Past Due
|
Total Loans Not Past Due
|
|||||||||||||||
Commercial
|
$ | 3,377,433 | $ | 444,713 | $ | 5,571,355 | 9,393,501 | $ | 225,113,689 | |||||||||||
Commercial Real Estate
|
||||||||||||||||||||
Construction
|
3,487,072 | - | 1,862,150 | 5,349,222 | 19,303,669 | |||||||||||||||
Other
|
- | 239,392 | 2,208,205 | 2,447,597 | 91,768,828 | |||||||||||||||
Residential Real Estate
|
||||||||||||||||||||
Traditional
|
738,767 | 121,252 | 1,054,645 | 1,914,664 | 52,459,174 | |||||||||||||||
Jumbo
|
1,183,388 | - | - | 1,183,388 | 24,715,658 | |||||||||||||||
Home Equity
|
48,433 | - | 17,471 | 65,904 | 38,554,735 | |||||||||||||||
Consumer
|
250,040 | 95,625 | 27,843 | 373,508 | 15,812,711 | |||||||||||||||
Total
|
$ | 9,085,133 | $ | 900,982 | $ | 10,741,669 | $ | 20,727,784 | $ | 467,728,464 |
Troubled Debt Restructurings:
The Company has allocated $445,000 and $485,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and December 31, 2010. The Company has committed to lend additional amounts totaling up to $497 and $8,962 as of March 31, 2011 and December 31, 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of the recorded investment of loans by class of loans is as follows:
March 31, 2011
|
Not Rated
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
|||||||||||||||
Commercial
|
$ | - | $ | 197,988,301 | $ | 19,342,991 | 11,830,588 | $ | 7,426,886 | |||||||||||
Commercial Real Estate
|
||||||||||||||||||||
Construction
|
- | 8,060,591 | 3,282,154 | 11,293,045 | 3,306,334 | |||||||||||||||
Other
|
- | 82,031,287 | 7,537,356 | 4,739,678 | 1,197,890 | |||||||||||||||
Residential Real Estate
|
||||||||||||||||||||
Traditional
|
52,266,252 | - | - | - | - | |||||||||||||||
Jumbo
|
29,526,003 | - | - | - | - | |||||||||||||||
Home Equity
|
35,909,221 | - | - | - | - | |||||||||||||||
Consumer
|
15,123,879 | - | - | - | - | |||||||||||||||
Total
|
$ | 132,825,355 | $ | 288,080,179 | $ | 30,162,501 | $ | 27,863,311 | $ | 11,931,110 |
December 31, 2010
|
Not Rated
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
|||||||||||||||
Commercial
|
$ | - | $ | 197,230,795 | $ | 15,507,296 | 15,459,634 | $ | 6,309,465 | |||||||||||
Commercial Real Estate
|
||||||||||||||||||||
Construction
|
- | 5,725,698 | 3,104,775 | 12,345,774 | 3,476,644 | |||||||||||||||
Other
|
- | 79,158,412 | 8,485,742 | 4,364,067 | 2,208,204 | |||||||||||||||
Residential Real Estate
|
||||||||||||||||||||
Traditional
|
54,373,838 | - | - | - | - | |||||||||||||||
Jumbo
|
25,899,046 | - | - | - | - | |||||||||||||||
Home Equity
|
38,620,639 | - | - | - | - | |||||||||||||||
Consumer
|
16,186,219 | - | - | - | - | |||||||||||||||
Total
|
$ | 135,079,742 | $ | 282,114,905 | $ | 27,097,813 | $ | 32,169,475 | $ | 11,994,313 |
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, home equity, and consumer classes, the Company also evaluates the credit quality based on the aging status of the loan, which was previously presented, and by activity. The following table presents the recorded investment in residential, home equity, and consumer loans based on aging status as of March 31, 2011 and December 31, 2010:
March 31, 2011
|
Not Past Due
|
30 - 89 Days Past Due
|
Greater than 90 Days Past Due Still Accruing
|
Nonaccrual
|
||||||||||||
Residential Real Estate
|
||||||||||||||||
Traditional
|
$ | 51,370,659 | $ | 60,156 | $ | 183,512 | $ | 651,925 | ||||||||
Jumbo
|
29,526,003 | - | - | - | ||||||||||||
Home Equity
|
35,749,393 | 41,487 | 118,341 | - | ||||||||||||
Consumer
|
14,731,407 | 385,120 | 7,352 | - | ||||||||||||
Total
|
$ | 131,377,462 | $ | 486,763 | $ | 309,205 | $ | 651,925 |
December 31, 2010
|
Not Past Due
|
30 - 89 Days Past Due
|
Greater than 90 Days Past Due Still Accruing
|
Nonaccrual
|
||||||||||||
Residential Real Estate
|
||||||||||||||||
Traditional
|
$ | 52,459,174 | $ | 860,019 | $ | 229,213 | $ | 825,432 | ||||||||
Jumbo
|
24,715,658 | 1,183,388 | - | - | ||||||||||||
Home Equity
|
38,554,735 | 48,433 | 179 | 17,292 | ||||||||||||
Consumer
|
15,812,711 | 345,665 | 27,843 | - | ||||||||||||
Total
|
$ | 131,542,278 | $ | 2,437,505 | $ | 257,235 | $ | 842,724 |
The following table summarizes the Company’s nonperforming assets at the dates indicated:
March 31, 2011
|
December 31, 2010
|
|||||||
Loans past due over 90 days and still accruing
|
$ | 2,872,769 | $ | 2,688,135 | ||||
Nonperforming restructured loans
|
2,119,335 | 7,501,958 | ||||||
Nonaccrual loans
|
12,738,444 | 12,939,331 | ||||||
Total nonperforming loans
|
$ | 17,730,548 | $ | 23,129,424 | ||||
Other real estate owned
|
4,740,592 | 4,284,263 | ||||||
Impaired Securities
|
401,717 | 421,529 | ||||||
Total nonperforming assets
|
$ | 22,872,857 | $ | 27,835,216 | ||||
Nonperforming assets to total assets
|
3.44 | % | 4.22 | % | ||||
Nonperforming loans to total loans
|
3.62 | % | 4.75 | % |
Note:Loan balances disclosed in the chart above are reported at unpaid principal.
Note 9 – Federal Home Loan Bank
Advances from the Federal Home Loan Bank (“FHLB”) were:
March 31, 2011
|
December 31, 2010
|
|||||||
3.19% bullet advance, principal due at maturity March 28, 2011
|
$ | - | $ | 2,000,000 | ||||
3.60% bullet advance, principal due at maturity April 28, 2011
|
1,500,000 | 1,500,000 | ||||||
0.48% variable rate advance, principal due at maturity September 13, 2011
|
1,500,000 | - | ||||||
0.48% variable rate advance, principal due at maturity September 26, 2011
|
4,500,000 | - | ||||||
3.55% bullet advance, principal due at maturity March 26, 2012
|
2,000,000 | 2,000,000 | ||||||
3.81% bullet advance, principal due at maturity March 26, 2013
|
2,000,000 | 2,000,000 | ||||||
$ | 11,500,000 | $ | 7,500,000 |
Of the total FHLB borrowings at March 31, 2011 and December 31, 2010, no advances had callable options.
At March 31, 2011 scheduled principal reductions on these FHLB advances were as follows:
Year
|
Advances
|
|||
2011
|
$ | 7,500,000 | ||
2012
|
2,000,000 | |||
2013
|
2,000,000 | |||
|
$ | 11,500,000 |
Note 10 – Fair Value Measurement
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value:
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), which include our agencies, municipal bonds, and the majority of our mortgage-backed securities. In certain cases where market data is not readily available because of lack of market activity or little public disclosure, values may be based on unobservable inputs and classified in Level 3 of the fair value hierarchy, which include our collateralized debt obligations and some mortgage-backed securities. Collateralized debt obligations, such as Trust Preferred Securities, which are issued by financial institutions and insurance companies have seen a decline in the level of observable inputs and market activity in this class of investments has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. The once active market has become comparatively inactive. The same is true for the mortgage-backed securities that are categorized as Level 3. As such, these investments are priced at March 31, 2011 and December 31, 2010 using Level 3 inputs. Due to current market conditions as well as the limited trading activity of these securities, the fair value is highly sensitive to assumption changes and market volatility.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
The following tables present for each of the fair-value hierarchy levels our assets that are measured at fair value on a recurring basis.
March 31, 2011
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agency debt obligations
|
$ | - | $ | 3,431,564 | $ | - | $ | 3,431,564 | ||||||||
Obligations of states and political subdivisions
|
- | 49,543,510 | - | 49,543,510 | ||||||||||||
Mortgage-backed securities (residential)
|
- | 58,392,943 | 7,650,172 | 66,043,115 | ||||||||||||
Mortgage-backed securities (commercial)
|
- | 4,617,450 | - | 4,617,450 | ||||||||||||
Collateralized debt obligations
|
- | - | - | - | ||||||||||||
Total
|
$ | - | $ | 115,985,467 | $ | 7,650,172 | $ | 123,635,639 |
December 31, 2010
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Available for sale securities:
|
||||||||||||||||
U.S. Government agency debt obligations
|
$ | - | $ | 4,172,667 | $ | - | $ | 4,172,667 | ||||||||
Obligations of states and political subdivisions
|
- | 45,759,402 | - | 45,759,402 | ||||||||||||
Mortgage-backed securities (residential)
|
- | 47,097,328 | 8,391,642 | 55,488,970 | ||||||||||||
Mortgage-backed securities (commercial)
|
- | 4,683,017 | - | 4,683,017 | ||||||||||||
Collateralized debt obligations
|
- | - | 4,600 | 4,600 | ||||||||||||
Total
|
$ | - | $ | 101,712,414 | $ | 8,396,242 | $ | 110,108,656 |
The following table represents the changes in the Level 3 fair-value category for the periods ended March 31, 2011 and March 31, 2010. We classify financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input in the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.
Available-for-sale securities
|
Available-for-sale securities
|
|||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||
For the three months ended
|
Collateralized Debt Obligation
|
Mortgage Backed Securities (residential)
|
Collateralized Debt Obligation
|
Mortgage Backed Securities (residential)
|
||||||||||||
Beginning Balance, January 1
|
$ | 4,600 | $ | 8,391,642 | $ | 10,000 | $ | 5,091,556 | ||||||||
Principal paydowns
|
- | (747,556 | ) | - | (255,943 | ) | ||||||||||
Net realized/unrealized gains (losses)
|
||||||||||||||||
Included in earnings:
|
||||||||||||||||
Interest income on securities
|
- | (1,980 | ) | - | 24,624 | |||||||||||
Credit loss recognized in earnings
|
(110,000 | ) | (14,999 | ) | - | (10,590 | ) | |||||||||
Included in other comprehensive income
|
105,400 | 23,065 | 28 | 167,607 | ||||||||||||
Purchases of Level 3 securities
|
- | 1,112,773 | ||||||||||||||
Transfers in (out) of Level 3
|
- | - | - | - | ||||||||||||
Ending Balance, March 31
|
$ | - | $ | 7,650,172 | $ | 10,028 | $ | 6,130,027 |
The table below summarizes changes in unrealized gains and losses recorded in earnings for the three-month period ending March 31 for Level 3 assets that are still held at March 31.
|
Changes in Unrealized Gains (Losses) Relating to Assets Held at Reporting Date for the Quarter Ended March 31
|
|||||||
Collateralized Debt Obligation
|
2011
|
2010
|
||||||
Impairment recognized in earnings
|
$ | 110,000 | $ | - | ||||
Total
|
$ | 110,000 | $ | - 0 - |
Changes in Unrealized Gains (Losses) Relating to Assets Held at Reporting Date for the Year Ended March 31
|
||||||||
Mortgage backed securities (residential)
|
2011
|
2010
|
||||||
Impairment recognized in earnings
|
$ | 14,999 | $ | 10,590 | ||||
Total
|
$ | 14,999 | $ | 10,590 |
Assets Measured at Fair Value on a Non-recurring Basis
Other certain assets and liabilities are measured at fair value on a non-recurring basis and are therefore not included in the tables above. These include impaired loans, which are measured at fair value based on the fair value of the underlying collateral, and other real estate owned. Fair value is determined, where possible, using market prices derived from an appraisal or evaluation. However, certain assumptions and unobservable inputs are used many times by the appraiser, therefore, qualifying the assets as Level 3 in the fair-value hierarchy.
The following tables present for each of the fair-value hierarchy levels our assets that are measured at fair value on a non-recurring basis.
March 31, 2011
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Impaired loans:
|
||||||||||||||||
Commercial
|
$ | - | $ | - | $ | 4,431,757 | $ | 4,431,757 | ||||||||
Commercial Real Estate
|
||||||||||||||||
Construction
|
- | - | 431,986 | 431,986 | ||||||||||||
Other
|
- | - | 3,641,323 | 3,641,323 | ||||||||||||
Other real estate owned:
|
||||||||||||||||
Commercial Real Estate
|
||||||||||||||||
Construction
|
$ | - | $ | - | $ | 51,700 | $ | 51,700 | ||||||||
Other
|
- | - | 1,230,315 | 1,230,315 | ||||||||||||
Residential Real Estate
|
||||||||||||||||
Traditional
|
- | - | 228,420 | 228,420 | ||||||||||||
Jumbo
|
- | - | - | - |
December 31, 2010
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
Impaired loans:
|
||||||||||||||||
Commercial
|
$ | - | $ | - | $ | 5,491,859 | $ | 5,491,859 | ||||||||
Commercial Real Estate
|
||||||||||||||||
Construction
|
- | - | 763,986 | 763,986 | ||||||||||||
Other
|
- | - | 4,617,865 | 4,617,865 | ||||||||||||
Other real estate owned:
|
||||||||||||||||
Commercial Real Estate
|
||||||||||||||||
Construction
|
$ | - | $ | - | $ | 1,878,255 | $ | 1,878,255 | ||||||||
Other
|
- | - | 917,000 | 917,000 | ||||||||||||
Residential Real Estate
|
||||||||||||||||
Traditional
|
- | - | 279,000 | 279,000 | ||||||||||||
Jumbo
|
- | - | - | - |
Impaired loans with specific allocations which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10.8 million, with a valuation allowance of $2.3 million at March 31, 2011, resulting in an additional provision for loan losses of $428,000 for the three months ended March 31, 2011 compared to additional provision expense of $337,000 recorded for the three months ended March 31, 2010. Impaired loans with a carrying amount totaling $4.3 million at March 31, 2011 and $5.4 million at December 31, 2010 were excluded from the chart above as these were measured using the present value of expected future cashflows, which is not considered fair value. At December 31, 2010, impaired loans had a carrying amount of $12.5 million, with a valuation allowance of $1.6 million.
Our internal policy on OREO properties requires an updated appraisal once every 12 months. Several appraisals were received during the fourth quarter of 2010 at which time those properties were written down to fair value. Based on receiving new appraisals on a few OREO properties over the last three months, we have marked four of them to fair value. At March 31, 2011, the carrying value of those properties was $1.6 million, with a valuation allowance of $60,000, resulting in additional OREO expense of approximately $113,780 for the three months ended March 31, 2011. We added one residential real estate property and one commercial real estate property totaling $1.3 million, which was offset by two sales with a carrying value that totaled $664,000. Subsequent to March 31, 2011, a purchase agreement was signed on one of the new OREO properties that are expected to close by the end of the second quarter, which would reduce OREO by approximately $900,000. At December 31, 2010 the carrying value was $3.5 million, with a valuation allowance of $446,043, resulting in additional OREO expense of approximately $446,000 for the year ended December 31, 2010.
In accordance with accounting standards the carrying values and estimated fair values of our financial instruments at March 31, 2011 and December 31, 2010 are as follows:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
Financial assets:
|
|
|
||||||||||||||
Cash and cash equivalents
|
$ | 15,868,146 | $ | 15,868,146 | $ | 29,679,382 | $ | 29,679,382 | ||||||||
Long-term interest earning deposits
|
996,000 | 996,000 | 996,000 | 996,000 | ||||||||||||
Securities available for sale
|
123,635,639 | 123,635,639 | 110,108,656 | 110,108,656 | ||||||||||||
FHLBI and FRB stock
|
4,075,100 | N/A | 4,075,100 | N/A | ||||||||||||
Loans held for sale
|
432,413 | 432,413 | 2,140,872 | 2,140,872 | ||||||||||||
Loans, net
|
477,341,780 | 481,043,587 | 474,424,715 | 477,931,195 | ||||||||||||
Accrued interest receivable
|
2,486,910 | 2,486,910 | 2,391,953 | 2,391,953 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Deposits
|
$ | (575,525,403 | ) | $ | (577,661,891 | ) | $ | (576,356,136 | ) | $ | (579,132,112 | ) | ||||
Federal funds purchased
|
(100,000 | ) | (100,000 | ) | - | - | ||||||||||
FHLB advances
|
(11,500,000 | ) | (11,667,250 | ) | (7,500,000 | ) | (7,716,450 | ) | ||||||||
Junior subordinated debt
|
(17,527,000 | ) | (16,818,812 | ) | (17,527,000 | ) | (16,537,065 | ) | ||||||||
Accrued interest payable
|
(1,641,739 | ) | (1,641,739 | ) | (1,415,713 | ) | (1,415,713 | ) |
Estimated fair value for securities available for sale is consistent with the hierarchy regarding fair value measurements. For securities where quoted market prices are not available, fair values are estimated based on market prices of similar securities and in some cases on unobservable inputs due to inactive market activity. Estimated fair value of FHLBI and FRB stock cannot be determined due to restrictions placed on its transferability. Estimated fair value for loans is based on the rates charged at period-end for new loans with similar maturities, applied until the loan is assumed to reprice or be paid and the allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Estimated fair value for IRAs, CDs, short-term borrowings, fixed rate advances from the FHLB and the junior subordinated debt is based on the rates at period-end for new deposits or borrowings, applied until maturity. Estimated fair value for other financial instruments and off-balance-sheet loan commitments is considered to approximate carrying value.
Note 11 – Reclassifications
Certain items in the financial statements and notes thereto were reclassified to conform to the current presentation. The reclassifications had no effect on net income or stockholders’ equity as previously reported.
The following presents management’s discussion and analysis of the consolidated financial condition of the Company as of March 31, 2011 and December 31, 2010 and results of operations for the three month periods ended March 31, 2011 and March 31, 2010. This discussion should be read in conjunction with the Company’s consolidated condensed financial statements and the related notes appearing elsewhere in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Executive Overview
Net income for the first quarter 2011 was $782,643, an increase of $61,607 from the first quarter of 2010. The increase in net income was primarily due to a decrease in provision expense of $120,000 and an increase in net interest income of $79,688. These increases to income were offset by an increase in noninterest expenses of $187,541. Net interest income increased primarily due to a drop in our cost of funds. Interest expense decreased by $576,823 compared to the same three-month period in 2010 ending March 31. Noninterest income also increased in 2011 compared to 2010 primarily due to an increase in the gain on the sale of securities by $57,829 and an increase in our net debit card interchange income by $46,822. Operating expenses increased primarily due to an increase of $172,006 in employment expenses and an increase of $136,123 in other real estate owned expenses. Most of the other expense categories remained the same or showed a slight decrease from the first quarter of 2010 to the first quarter of 2011, each of which was less than $100,000, including loan and professional costs, office supplies and occupancy and equipment expenses.
Total assets increased by $4.2 million from December 31, 2010 to March 31, 2011. The increase in total assets was primarily due to an increase in long-term investments and bank owned life insurance totaling $16.7 million offset by a decrease in cash and cash equivalents by $13.8 million. We also experienced an increase of $2.3 million in total loans, which primarily came from our commercial and commercial real estate portfolios.
Total deposits decreased by $830,733 to $575.5 million as of March 31, 2011, primarily due to decreases of $6.7 million, $6.1 million, and $5.3 million in certifcates of deposit, money market accounts, and noninterest bearing checking accounts, respectively. These decreases were offset by increases of $13.8 million in our interest bearing checking and $4.9 million in our brokered deposits. Core deposits decreased by $2.6 million, and now comprise 74.5% of total deposits.
Financial Condition
Total assets were $664.1 million at March 31, 2011 compared to total assets at December 31, 2010 of $659.9 million. The 0.6% increase in assets was primarily due to an increase in long-term investments and bank owned life insurance of $16.7 million, which was offset by a decrease in cash and cash equivalents by $13.8 million.
Cash and Investments. Cash and cash equivalents, which include federal funds sold, were $15.9 million at March 31, 2011, a decrease of $13.8 million, or 46.5%, from December 31, 2010. The cash was used to purchase securities available for sale, which increased by $13.5 million from December 31, 2010 to $123.6 million at the end of the first quarter of 2011. The increase in long-term investments was primarily in municipal bonds and residential mortgage-backed securities, which increased by $3.8 million and $10.6 million, respectively. Long-term investments now comprise 18.6% of total assets, as we continue to focus on liquidity and repositioning of the balance sheet.
Loans. Total loans were $489.2 million at March 31, 2011 reflecting a 0.5% increase from total loans of $486.9 million at December 31, 2010. The increase in loans during the first three months of 2011 occurred mainly in the commercial and commercial real estate loan categories, which increased by a total of $4.5 million
Nonperforming Assets. Nonperforming assets include impaired securities, nonperforming loans, and other real estate owned (OREO). Nonperforming loans include loans past due over 90 days and still accruing interest, nonperforming restructured loans, and all nonaccrual loans. Nonperforming assets have decreased from $27.8 million, or 4.2% of total assets, at December 31, 2010 to $22.9 million, or 3.4% of total assets, at March 31, 2011. The decrease was primarily attributable to two restructured loans totaling $5.4 million moving to performing status. These two relationships have demonstrated their ability to consistently make scheduled payments based on the restructured terms. Included in delinquencies greater than 90 days as of March 31, 2011 and December 31, 2010 is an accruing $1.8 million loan that has matured. The Bank has elected not to renew the loan and is seeking collection via legal process. The loan remains in accruing status because it is further supported by the unlimited guaranty of a third party whose guaranty is fully secured by a mortgage on a performing commercial real estate property that is unrelated to the borrower’s enterprise and cash collateral of $645,000 on deposit in the Bank’s name. This loan is expected to remain nonperforming during the pendency of our legal collection efforts but ultimate collection is not currently in doubt. Without this item, non-performing assets would have totaled $21.1 million, or 3.2% of total assets and $26.0 million, or 3.9% of total assets at March 31, 2011 and December 31, 2010, respectively.
Non-accrual loans decreased by $200,887 during the first quarter of 2011 primarily due to the sale of a $1.9 million commercial loan and the transfer of two loans to OREO in the amount of $1.3 million. The reductions to non-accruals were offset by adding four commercial and one commercial real estate relationship totaling $3.2 million. These additions to non-accruals resulted in $130,000 of additional provision expense for the quarter ending March 31, 2011.
The increase in OREO of $456,329 was a direct result of the addition of two loan foreclosures, one commercial real estate and one residential real estate property, totaling $1.3 million since December 31, 2010. Offsetting the additions was the sale of two residential real estate properties and one commercial real estate property, which caused a reduction of $706,987 in other real estate owned. Subsequent to March 31, 2011, a purchase agreement was signed on a commercial real estate property that will reduce other real estate owned by approximately $900,000 before the end of the second quarter of 2011.
Loans are deemed impaired when it is probable that we will not be able to collect all principal and interest amounts due according to their contractual terms, which includes most nonperforming loans. Total impaired loans at March 31, 2011 were $29.4 million, compared to $31.6 million at December 31, 2010. At March 31, 2011, management believes it has allocated adequate specific reserves for these risks.
Allowance for Loan Losses. In each quarter the allowance for loan loss is adjusted to the amount management believes is necessary to maintain the allowance at adequate levels. Management allocates specific portions of the allowance for loan losses to specific problem loans. Problem loans are identified through a loan risk rating system and monitored through watchlist reporting. Specific reserves are determined for each identified problem loan based on delinquency rates, collateral and other risk factors specific to that problem loan. Management’s allocation of the allowance to other loan pools considers various factors including historical loss experience, the present and prospective financial condition of borrowers, industry concentrations within the loan portfolio, general economic conditions, and peer industry data of comparable banks.
The allowance for loan losses at March 31, 2011 was $11.9 million, or 2.43% of total loans outstanding, a decrease of $581,605 from $12.5 million, or 2.57% of total loans outstanding, at December 31, 2010. The provision for loan losses during the first three months of 2011 was $1.2 million compared to $1.3 million in the first three months of 2010 as a result of management’s focus on reducing classified assets over the last year.
For the first three months of 2011, we were in a net charge-off position of $1.8 million compared to a net charge-off position of $788,504 for the three months of 2010. The increase in the charge-offs from the first quarter 2010 compared to the first quarter 2011 was a result of management’s decision to aggressively reduce classified assets. The reduction occurred through the sale of loans and OREO properties, discounts taken on loans to allow the customer to refinance through other institutions, payoffs, and write-downs to fair value. Nonperforming loans decreased by $5.4 million during the first three months of 2011. The specific allowance allocations decreased by $372,876 to $3.4 million in the first three months of 2011 primarily due to charging down one commercial real estate relationship by $1.0 million that was previously reserved and did not require additional reserves as of March 31, 2011.
Other Assets. Other assets, which includes bank owned life insurance and prepaid FDIC insurance, increased by $2.8 million, primarily from the $3.0 million purchase of bank owned life insurance. Prepaid FDIC insurance decreased $486,957 and will continue to decrease as the quarterly amounts are expensed.
Deposits. Total deposits were $575.5 million at March 31, 2011 compared to total deposits at December 31, 2010 of $576.4 million. The decrease of $830,733 during the first three months of 2011 was a combination of an increase in interest bearing deposits, primarily in health savings accounts, of $13.8 million and an increase in brokered deposits of $4.9 million offset by decreases of $6.7 million, $6.1 million, and $5.3 million in certifcates of deposit, money market accounts, and noninterest bearing accounts, respectively. Core deposits decreased by $2.6 million over the first three months of 2011, but remain at 74.5% of total deposits. Total brokered deposits were $110.4 million at March 31, 2011, which includes brokered certifcates of deposit of $98.4 million and brokered money market accounts of $12.0 million. Brokered deposits were $105.5 million at December 31, 2010. We have strategically increased our brokered deposits, in both certificates of deposit for the long-term funding and money market accounts for the short-term funding. We have been able to lock in rates on brokered certificates of deposits over a period ranging from two to ten years. Based on the current interest rate environment and the competition in the local market, funding is and will continue to be the primary way to manage net interest margin.
The following table summarizes the Company’s deposit balances at the dates indicated:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Balance
|
%
|
Balance
|
%
|
|||||||||||||
Core deposits:
|
||||||||||||||||
Noninterest-bearing demand
|
$ | 87,598,846 | 15.2 | % | $ | 92,872,957 | 16.1 | % | ||||||||
Interest-bearing checking
|
114,920,403 | 20.0 | % | 101,158,162 | 17.6 | % | ||||||||||
Money market
|
153,225,501 | 26.6 | % | 159,336,066 | 27.7 | % | ||||||||||
Savings
|
21,247,225 | 3.7 | % | 22,672,555 | 3.9 | % | ||||||||||
Time, under $100,000
|
51,881,437 | 9.0 | % | 55,450,402 | 9.6 | % | ||||||||||
Total core deposits
|
428,873,412 | 74.5 | % | 431,490,142 | 74.9 | % | ||||||||||
Non-core deposits:
|
||||||||||||||||
In-market non-core deposits: Time, $100,000 and over
|
36,220,770 | 6.3 | % | 39,356,777 | 6.8 | % | ||||||||||
Out-of-market non-core deposits:
|
||||||||||||||||
Money market
|
12,020,676 | 2.1 | % | 12,015,936 | 2.1 | % | ||||||||||
Brokered certificate of deposits
|
98,410,545 | 17.1 | % | 93,493,281 | 16.2 | % | ||||||||||
Total out-of-market deposits
|
110,431,221 | 19.2 | % | 105,509,217 | 18.3 | % | ||||||||||
Total non-core deposits
|
146,651,991 | 25.5 | % | 144,865,994 | 25.1 | % | ||||||||||
Total deposits
|
$ | 575,525,403 | 100.0 | % | $ | 576,356,136 | 100.0 | % |
Borrowings. The Company had borrowings in the amount of $11.5 million in Federal Home Loan Bank (“FHLB”) advances at March 31, 2011 and $7.5 million at December 31, 2010. Of the outstanding FHLB advances at March 31, 2011, $5.5 million are bullet advances and mature in a range from March 2011 through March 2013. The remaining $6.0 million are variable rate advances that mature in September 2011.
Other Liabilities. Other liabilities and accrued interest payable decreased from $5.4 million at December 31, 2010 to $5.1 million at March 31, 2011. Accrued interest payable increased by $226,026, primarily from the deferral of our interest payments related to our Junior Subordinated debt. This was offset by a decrease in accrued bonus due to the 2010 bonus being paid out in February.
Results of Operations
For The Three-Month Periods Ended March 31
Results of operations for the three-month period ended March 31, 2011 reflected net income of $782,643, or $0.16 per diluted share. This was a $61,607 increase from 2010’s first quarter net income of $721,036, or $0.16 per diluted share. The operating results for the three-month period ended March 31, 2011 were favorable as we experienced an increase in our net interest income of $79,688, a decrease in loan loss provision of $120,000, and an increase in non-interest income by $49,519. Noninterest expenses increased by $187,541, or 3.8%, from the same three-month period in 2010.
Performance Ratios
|
March 31
|
|||||||
2011
|
2010
|
|||||||
Return on average assets *
|
0.48 | % | 0.43 | % | ||||
Return on average equity *
|
5.91 | % | 6.17 | % | ||||
Net interest margin (TEY) *
|
3.83 | % | 3.66 | % | ||||
Efficiency ratio
|
69.86 | % | 68.50 | % |
* annualized
Net Interest Income. Interest income for the three-month periods ended March 31, 2011 and 2010 was $7.3 million and $7.8 million, respectively, while interest expense for the first quarter was $1.6 million in 2011 and $2.2 million in 2010, resulting in net interest income of $5.6 million for the same three-month period in 2011 and 2010. The tax equivalent net interest margin for the first quarter of 2011 was 3.83%, while the tax equivalent net interest margin for the first quarter of 2010 was 3.66%. The improvement in our net interest margin came primarily from an aggressive reduction in cost of funding, which was consistent with our strategy to decrease higher cost deposits and replace them with lower cost out-of-market deposits that can be structured to reduce interest rate risk in the future. We have been able to take advantage of the low interest rate environment by increasing brokered deposits as discussed previously under the section “Financial Condition – Deposits.” The increase in our net interest margin was offset by a decrease in earning assets of $11.3 million from the first quarter 2010. While we estimate the interest rates will remain relatively flat for the remainder of the year, we expect some minimal margin compression to occur over the next few quarters as we look to mitigate some of our interest rate risk by locking in funding costs over a longer term, two to ten years, through the use of brokered deposits.
The following table reflects the average balance, interest earned or paid, and yields or costs of the Company’s assets, liabilities and stockholders’ equity at and for the dates indicated:
As of and For The Three Month Period Ended
|
||||||||||||||||||||||||
March 31, 2011
|
March 31, 2010
|
|||||||||||||||||||||||
Interest
|
Annualized
|
Interest
|
Annualized
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Average
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Earned
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Yield
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Average
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Earned
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Yield
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($ in thousands)
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Balance
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or Paid
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or Cost
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Balance
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or Paid
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or Cost
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Assets
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Short-term investments and interest-earning deposits
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$ | 2,785 | $ | 13 | 1.89 | % | $ | 2,432 | $ | 4 | 0.67 | % | ||||||||||||
Federal funds sold
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2,013 | 1 | 0.20 | % | 3,720 | 2 | 0.22 | % | ||||||||||||||||
Securities - taxable
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80,112 | 579 | 3.00 | % | 71,040 | 639 | 3.65 | % | ||||||||||||||||
Securities - tax exempt (1)
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41,668 | 596 | 5.81 | % | 24,419 | 371 | 6.16 | % | ||||||||||||||||
Loans held for sale
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1,689 | - | 0.00 | % | 1,157 | - | 0.00 | % | ||||||||||||||||
Loans
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489,999 | 6,289 | 5.21 | % | 526,814 | 6,883 | 5.30 | % | ||||||||||||||||
Total interest-earning assets
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618,266 | 7,478 | 4.91 | % | 629,582 | 7,899 | 5.09 | % | ||||||||||||||||
Allowance for loan losses
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(12,964 | ) | (12,040 | ) | ||||||||||||||||||||
Cash and due from banks
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19,509 | 19,284 | ||||||||||||||||||||||
Other assets
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39,753 | 41,141 | ||||||||||||||||||||||
Total assets
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$ | 664,564 | $ | 677,967 | ||||||||||||||||||||
Liabilities and Stockholders' Equity
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Interest-bearing checking
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$ | 115,584 | $ | 46 | 0.16 | % | $ | 106,890 | $ | 106 | 0.40 | % | ||||||||||||
Savings
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23,156 | 15 | 0.26 | % | 19,152 | 19 | 0.40 | % | ||||||||||||||||
Money market
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167,363 | 194 | 0.47 | % | 149,750 | 323 | 0.87 | % | ||||||||||||||||
Certificates of deposit
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185,183 | 1,106 | 2.42 | % | 200,216 | 1,312 | 2.66 | % | ||||||||||||||||
Short-term borrowings
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67 | - | 0.00 | % | - | - | 0.00 | % | ||||||||||||||||
FHLB advances
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10,489 | 72 | 2.78 | % | 44,765 | 170 | 1.54 | % | ||||||||||||||||
Junior subordinated debt
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17,527 | 200 | 4.63 | % | 17,527 | 280 | 6.48 | % | ||||||||||||||||
Total interest-bearing liabilities
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519,369 | 1,633 | 1.28 | % | 538,300 | 2,210 | 1.67 | % | ||||||||||||||||
Noninterest-bearing checking
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86,368 | 88,231 | ||||||||||||||||||||||
Other liabilities
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5,165 | 4,016 | ||||||||||||||||||||||
Stockholders' equity
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53,662 | 47,420 | ||||||||||||||||||||||
Total liabilities and stockholders' equity
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$ | 664,564 | $ | 677,967 | ||||||||||||||||||||
Net interest income
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$ | 5,845 | $ | 5,689 | ||||||||||||||||||||
Rate spread
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3.63 | % | 3.42 | % | ||||||||||||||||||||
Net interest income as a percent of average earning assets
|
3.83 | % | 3.66 | % |
(1) Computed on a tax equivalent basis for tax exempt securities using a 34% statutory tax rate.
Provision for Loan Losses. A provision for loan losses was recorded in the amount of $1.2 million, or 101 basis points, annualized, on average loans during the first quarter of 2011 as compared to $1.3 million, or 103 basis points, annualized, on average loans for the first quarter of 2010. The allowance for loan losses at March 31, 2011 totaled $11.9 million and was 2.43% of total loans outstanding on that date. For the three-month period ended March 31, 2011 we were in a net charge-off position of $1.8 million, or 149 basis points, annualized, on average loans compared to net charge-off of $788,504, or 61 basis points, annualized, on average loans during the same period a year ago. The charge-offs taken in 2011 were mainly made up of three loans. One commercial real estate loan recorded a $1.0 million charge-off, which had been reserved for previously. Two commercial loans made up another $681,514 of the net charge-offs, of which one loan was sold causing a $1.9 million reduction in non-accruals and the other loan was charged down to the remaining collateral value.
Noninterest Income. Noninterest income was $1.6 million during the first quarter of 2011. This was a $49,519 increase compared to the first quarter of 2010. The majority of the increase relates to increase of $46,822 in net debit card interchange income primarily due to the increase in the number of debit cards outstanding and the conversion to another service provider in February of 2011. The increase in the gain on sale of available for sale securities of $57,829 contributed to the increase in noninterest income, but was offset by an increase in the other-than-temporary-impairment charge of $114,409 compared to the first quarter of 2010.
Noninterest Expense. Noninterest expense was $5.1 million for the first quarter of 2011 while noninterest expense for the three-month period ended March 31, 2010 was $4.9 million. The main components of noninterest expense for the first quarter of 2011 were salaries and benefits of $2.6 million, occupancy and equipment costs of $619,606, FDIC insurance premiums of $506,848, loan and professional expenses of $361,442, and data processing costs of $309,305. Employee benefits and OREO expenses displayed the largest increases of $172,006 and $136,123, respectively. The increase in employee benefits was caused by a standard increases in salaries, new incentive plans, and increase in payroll taxes. The increased payroll tax is primarily due to the unplanned increase in the state’s unemployment tax for 2011. The increase in OREO expense was due to write-downs caused by the decrease in property values based on receiving updated appraisals on several properties. FDIC premiums remained relatively unchanged compared to the same three-month period in 2010. The FDIC has announced a reduction of their assessment rates effective April 1, 2011. We expect an immediate 8 to 10 basis point reduction in our assessment rates based on our current deposit balances.
Income Taxes. During the quarters ended March 31, 2011 and 2010, the Company recorded $194,861 and $194,802 in income taxes expense, respectively. The effective tax rate recorded was 19.9% for 2011 as compared to 21.3% for 2010. The reduction in the effective tax rate from 2010 was caused by an increase in tax exempt income, including bank owned life insurance and municipal interest income.
Liquidity and Capital Resources
Liquidity. Our general liquidity strategy is to fund growth with deposits and to maintain an adequate level of short- and medium-term investments to meet typical daily loan and deposit activity needs. We experienced a decrease of $830,733 in total deposits during the first three months of 2011. While we continue to encourage the growth of in-market deposits, we believe we have positioned ourselves to increase our out-of-market brokered deposits and FHLB advances while allowing higher cost in-market certificates of deposit to leave as they mature. This strategy has allowed us to reduce interest rate risk by purchasing brokered deposits and maintain an adequate net interest margin. Currently, $5.5 million of our FHLB advances are fixed rate bullet advances with no callable options; therefore, we must wait until maturity to repay. We also have $6.0 million in variable rate FHLB advances that can be repaid anytime with scheduled maturities in September 2011. Included in our out-of-market funding base are borrowings from the FHLB, brokered deposits, and trust preferred securities. In the aggregate these out-of-market deposits and borrowings represented $139.6 million, or 23.1% of our total funding, at March 31, 2011. This was up from $130.5 million, or 21.7%, at December 31, 2010. Total deposits at March 31, 2011 were $575.5 million and the loan to deposit ratio was 85.0%. Total borrowings at March 31, 2011 were $29.1 million. We expect to experience minimal to moderate loan growth in the near-term due to current economic conditions, as well as the continuation of management’s strategy, which focuses on profitability, rather than growth. We expect to continue funding the majority of any loan growth with a mix of in-market and out-of-market sources that will be structured to mitigate future interest rate risk.
Capital Resources. Stockholders’ equity is a noninterest-bearing source of funds, which provides support for asset growth. Stockholders’ equity was $54.4 million and $53.1 million at March 31, 2011 and December 31, 2010, respectively. Affecting the increase in stockholders’ equity during the first three months of 2011 was $782,643 in net income and $489,901 in unrealized gains, net of tax, on available for sale securities. Additionally, we recorded $11,727 of restricted stock compensation expense.
During the first three months of 2011, we made no dividend payments. We have not made dividend payments since the first quarter of 2008, based on our desire to retain capital and hedge against challenging economic and banking industry conditions as well as to maintain Tower Bank’s current “well capitalized” status within the Federal Reserve System. Under the terms of our current agreement with our regulatory agencies, we must first be granted permission by them in order to declare and pay any dividends.
The following table summarizes the capital ratios of the Company and the Bank at the dates indicated:
March 31, 2011
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December 31, 2010
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Well-
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Minimum
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Well-
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Minimum
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|||||||||||||||||||||
Actual
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Capitalized
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Required
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Actual
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Capitalized
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Required
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The Company
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Leverage capital
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10.59 | % | 5.00 | % | 4.00 | % | 10.55 | % | 5.00 | % | 4.00 | % | ||||||||||||
Tier 1 risk-based
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13.27 | % | 6.00 | % | 4.00 | % | 13.10 | % | 6.00 | % | 4.00 | % | ||||||||||||
Total risk-based
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14.53 | % | 10.00 | % | 8.00 | % | 14.30 | % | 10.00 | % | 8.00 | % | ||||||||||||
The Bank
|
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Leverage capital
|
10.15 | % | 5.00 | % | 4.00 | % | 10.08 | % | 5.00 | % | 4.00 | % | ||||||||||||
Tier 1 risk-based
|
12.64 | % | 6.00 | % | 4.00 | % | 12.46 | % | 6.00 | % | 4.00 | % | ||||||||||||
Total risk-based
|
13.90 | % | 10.00 | % | 8.00 | % | 13.72 | % | 10.00 | % | 8.00 | % |
Commitments and Off-Balance Sheet Risk
The Bank maintains off-balance-sheet instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized, if any, in the balance sheet. The Bank’s maximum exposure to loan loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. Such financial instruments are recorded when they are funded. Fair value of the Bank’s off-balance-sheet instruments (commitments to extend credit and standby letters of credit) is based on rates currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. At March 31, 2011, the rates on existing off-balance-sheet instruments were equivalent to current market rates, considering the underlying credit standing of the counterparties.
Tabular disclosure of the Company’s contractual obligations as of the end of our latest fiscal year was provided in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no material changes outside the ordinary course of business in such contractual obligations during the first three months of 2011.
a. Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934), under the supervision and the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission rules and forms. Furthermore, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed is accumulated and communicated to our management in an appropriate manner so as to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
c. Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting or in our procedures during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, nor were we required to take nor did we take any corrective actions with regard to any significant deficiencies or material weaknesses in internal control over financial reporting.
PART II. OTHER INFORMATION
No material litigation
As reported in our Form 10-K, we are subject to extensive regulation, supervision and examination by the Indiana Department of Financial Institutions (the IDFI), the Federal Reserve and the FDIC, as insurer of its deposits. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage, and are intended primarily for the protection of the depositors and borrowers of Tower Bank and for the protection of the FDIC insurance fund. The regulation and supervision by the Federal Reserve, the IDFI and the FDIC are not intended to protect the interests of investors in our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the adverse classification of our assets and determination of the level of our allowance for loan losses. Starting in 2010, this risk factor has increased in importance with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the uncertainty of the exact impact it will have on financial institutions.
In addition to the information set forth above and throughout this report, you should carefully consider the factors discussed in Part I, Item 1a “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which could materially affect our business, financial condition or future results.
Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
Certification of Chief Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
*Filed with concurrently herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TOWER FINANCIAL CORPORATION
|
||
Dated: April 29, 2011
|
/ s / Michael D. Cahill | |
Michael D. Cahill, President
|
||
and Chief Executive Officer
|
||
Dated: April 29, 2011
|
/ s / Richard R. Sawyer | |
Richard R. Sawyer
|
||
Chief Financial Officer
|
37